My Quarterly P2P Lending Results – Q2 2012

Every quarter I share in detail the returns I am getting from my p2p lending investments at Lending Club and Prosper. I do this for several reasons. One, return on investment is what interests most readers. I also like to provide a level of transparency so everyone can see that I don’t just write about p2p lending, I am truly committed to it. Finally, it makes me accountable – I know that every quarter I need to display my returns for the world to see.

Earlier this week I gave some detail as to how I calculate my real p2p lending returns with the XIRR function, so I use this same method to calculate my returns across all my accounts. Speaking of which I currently have a total of six different accounts that are detailed in the table below. I provide my starting and ending balances, any additions I made to the accounts, total interest earned and my real return. The Return on Site shows the return that was displayed at Lending Club or Prosper at the end of the quarter.

Account

Balance 6/30/11

Additions

Balance 6/30/12

Net Interest

XIRR ROI

Return on Site

Lending Club Main

$11,635.14

$14,000.00

$27,348.17

$1,713.03

10.19%

10.09%

Lending Club Roth IRA

$5,011.70

$0.00

$5,658.63

$646.93

12.91%

15.97%

Lending Club Trad IRA

$59,004.39

$0.00

$62,907.46

$3,903.07

6.61%

8.03%

Lending Club Roth IRA - PRIME

$15,160.67

$0.00

$15,938.10

$777.43

5.13%

7.62%

Prosper Main

$5,208.74

$33,000.00

$42,222.39

$4,013.65

18.39%

18.37%

Prosper - 2

$1,105.76

$1,000.00

$2,485.45

$379.69

20.54%

19.86%

Totals

$97,126.40

$48,000.00

$156,560.20

$11,433.80

9.57%

Below is a brief discussion of each of the six accounts in the table.

Lending Club Main

My main Lending Club account has shown the biggest improvement. This month marks the three-year anniversary since opening this account at Lending Club. For for first two years I had quite a conservative strategy with this account – focusing primarily on the A-, B- and C-grade loans. As I said last year I switched course and started investing only in the D-G grade loans which carry a much higher interest rate. My trailing twelve month (TTM) return has increased from 6.29% in December, 2011 to 8.04% in March, 2012 to 10.19% in June, 2012. At the same time I know this is now a relatively young account because I have more than doubled the amount invested in the last six months.

Lending Club Roth IRA

This account was opened in April, 2011 with the intention of seeing what was the highest possible return I could manage with a Lending Club account. From the start I have only invested in D-G grade loans so this account has my highest average interest rate of 18.51% out of all my Lending Club accounts. The average loan age here is just under 10 months so I know that I will have many more defaults in this account. Right now, I am pleased with the performance here – just five defaults out of 285 notes and only one note currently late. It took me six months to be fully invested in this account so my return of 12.91% includes a period where there was significant cash sitting in the account.

Lending Club Traditional IRA

This account began as a Lending Club PRIME account when I rolled over several retirement accounts my wife had accumulated and consolidated everything in this one account. I decided to take this account off PRIME in November of last year and manage it myself. Since then all reinvestments have been made into D-G grade loans ond the returns are slowly (very slowly) increasing as a result of this change. When I took this account off PRIME it had 1,118 notes and now seven months later the total is 1,392 notes. It is going to take 12 months or more before the majority of my notes are D-G grade and by then I expect that my return will be up close to 10%.

Lending Club Roth IRA – PRIME

This account was opened at the same time as the traditional IRA account above – my wife had a Roth 401k from her last job and so this I rolled into a Lending Club Roth IRA. I opened this as a PRIME account and have kept it that way. Even though I am confident I could do better managing this account myself I have kept this account on PRIME as an experiment. In the latest quarter that experiment has been a little disappointing. This account is around two years old now and the latest ROI number of 5.13% is the lowest ever and down from 7.96% just six month ago. I was hit with 11 new defaults this quarter which is the primary reason the return went down so much.

Prosper Main

I couldn’t be happier with my main Prosper account. The returns here continue to be outstanding, much better than I expected. I thought my ROI would be down to around 15% this quarter but it has stayed remarkably steady above 18% despite the eight new defaults. I am under no illusions about this return number, I know this is a young account (average loan age of 7 months) so defaults haven’t really picked up yet. With 33 late loans I expect defaults will at least double this quarter which will see my return drop. When I check my account on Lendstats my estimated return is around 13% which is below my long term goal of 15% but it is probably closer to the real number going forward. We will see.

Prosper – 2

My second account at Prosper is under my wife’s name and I opened that when Prosper ran a special $104 giveaway in April last year. In the last year I added $1,000 and I intend to keep this account small. I want to see what kind of return can be achieved in a small and only a minimally diversified account. I have taken a deliberate high risk approach here with an average interest rate of 29.95%, the highest of any of my accounts. So far returns are holding up well but with an average age of 8 months the account is still very young. Lendstats has my estimated return here at almost 18% but I expect that will drop to the 13-14% range here soon.

My Overall P2P Lending Return

This latest quarter was certainly a good one. I managed to increase my annual real world ROI from 8.58% for the year ended March 31, 2012 up to 9.57% for the year ending June 30, 2012 – almost a full percentage point higher. My strategy change last year in focusing on just the high interest loans is really starting to impact my returns as the average interest rate in my portfolio continues to increase. I am well on track to increase my total returns to over 10% by the end of the year and that may well happen this coming quarter.

While a good return number is nice the net interest amount is what is really important and that grew to over $10,000 in a year for the first time. At $11,434 (with a good chunk of it tax free because it is inside an IRA) this is up more than $2,000 from the TTM number in March. I will update all these accounts again in three months.

Comments

Good update. You are doing well. BTW, what is your experience with PRIME account and why did you take one account off PRIME? I heard from several readers of my blog about their concerns with PRIME and LCA BBF … seems LC deploys money too fast and defaults/charge off start showing up quickly. It will be good to read your opinion. I was thinking of analyzing BBF, but I don’t have much historical data on it. Thanks.

The account I took off PRIME was and continues to be my largest account. I feel that I can do better with my own selections than LC does with their PRIME. I look at it this way. The LC PRIME account is like an index fund – you are getting access to the broad market. I believe that with careful note picking I can beat the index and I didn’t want to have such a large amount invested that wasn’t in my control.

As for your comment about the LC Advisors Broad Based Fund (BBF) this acts like a PRIME account in that it reflects the market. The returns on this fund continues to be around 10% or so but there is so much new money coming in all the time that it is a relatively young portfolio. I would expect returns to be in the 7-8% range long term for that fund.

That is a good question Dan and one that there is no easy answer for. I can say this. When I look at my new portfolios and their ROI on Nickelsteamroller.com I see that they are all above 15% so the fact that I have been focused on high interest loans is pulling up the average. The fact that these loans are all young will accentuate that. The older portfolios, with a B-grade average, are doing between 5-6%.

Now that Prosper is offering a form of ‘managed’ account like LC Prime, do you intend to create another Prosper account to see how they do with your investments? Also, in following your blog this year I get the feeling you prefer LC over Prosper; or at least seem to write more about LC. I’m seeing returns similar to you with my Prosper account (which I post at http://www.ProsperToRetire.com). With such better returns on Prosper why the apparent lean towards LC? I haven’t invested with LC yet which is why I’m curious.

Thanks for chiming in Terry and congrats on your new blog. I have added to my reading list in Google Reader. I am not going to be giving Prosper Premier a try for the reasons I stated above. I believe I can do better choosing my own loans. To be honest if Lending Club were just introducing their PRIME service now I wouldn’t be choosing them either. Since I started two accounts on PRIME in 2010 I am fine with leaving the small one as it is and seeing how it performs long term.

I actually don’t have a preference for Lending Club over Prosper. I started with Lending Club in 2009 because Prosper was in their quiet period. I am adding far more money into Prosper than Lending Club in order to even out my investments between the two companies. I write about Lending Club more than Prosper mainly because they create more news being the industry leader. But I want to be clear that I think Prosper is an excellent investment as well.

A good review, and I generally continue to mirror your strategy, in that I started out with A, B, C notes for the first 10 months, before switching to C-F notes as my strategy, and my returns are now hovering around 12%. I continue to add $500 every 2 weeks or so, which I find to be the right amount in order to remain fully invested based on my selection criteria.

I believe that I will eventually round out to around a 13% return, which I think is pretty great in this market.

@Danny, It is a brave investor who would start out in p2p lending investing in the high risk notes – most people like to get their feet wet by investing in the conservative loans to see how they go. And I know many investors who stay there happy with the 4-5% returns because it is so much better than they can get elsewhere these days. But as you and I know the potential of p2p lending is 10% returns or more.

Peter……………I’m guessing that some of your newer readers might be interested in knowing what percentage allocations you’d suggest they consider between LC & Prosper……………… say for someone who hasn’t invested in p2p yet, but is ready to pull the trigger. Would you say that a 50/50 split makes sense or some other ratio?

I’ve had 2 people who I’ve discussed p2p at length with over the last few years contact me recently wanting to revisit the conversations. I suppose the interest rates available elsewhere have finally gotten unbearably low for them. In any case, I’m curious as to how our recommendations compare for a 800 note ($20k) initial deployment of capital.

@Dan, I am actually planning a series of posts for beginners later this month and I will add your idea into the mix. I know most of my regular readers are long time investors so most posts are written for them but I also know I get many brand new investors coming to the blog every day and so some relevant information for them is overdue.

Thanks for sharing your returns with us. They look pretty impressive. Everytime I come here (to your website) I get encouraged and want to get all the more aggresive with P2P lending, but I’m still holding back as experience has taught me (the hard way) to go slow at something until you fully understand it.

I’ve been at this for 10 months now and have split myself pretty evenly between Lending Club and Prosper if you don’t count my Lending Club IRA. By the way, apparently Lending Club finally got the go-ahead from Florida on the primary platform as I just got an email a few days ago that my IRA is now ready for investing. I’m very happy about that as I’ve been waiting over 3 months. Anyway, I’m approaching 10k now in each of my primary accounts (Lending Club and Prosper) and am having two different experiences using the same investment strategy. With Lending Club, I’m attaining an 18.69% NAR on on 333 active notes with only 1 note in collections (had 2 but 1 just paid by mail with a check to make it current) and no charge-offs or any other lates, all is going extremely well there. However, with Prosper I’m getting an 18.80% NAR (25.47% average note yeild) on 326 active notes but I have 5 in collections and 4 currently late (9 notes in total late). I also have 1 charge-off already. I love the returns with Prosper as the interest is building fast, quite a bit faster than Lending Club, but the charge-offs are coming and I know that will bring my return down a lot (at least I I fear). My frustration with Prosper is that there is no transperency on what if anything they do on late notes. Lending Club will post immdiately everything they do to make the borrower current. They will post the dates of calls, emails, or any correspondence to the borrower to get them current again. Prosper, on the other hand, posts absolutely nothing. Do they even make an effort on a late payment??? I really wonder and I also wonder if there really is a collections agency as there is absolutely no evidence of that so far. Lending Club posts everything the collections agency does while the notes are late, and that gives me comfort in that at least something is being done. Why doesn’t Prosper do that? My question to anyone who can answer, is what exactly, if anything, does Prosper do when a note becomes late? I hope they do something, but like I said, I’ve seen no evidence of that so far.

When I get to 10k with Prosper (really close to that now) I’m going to wait before I invest anymore money to see the results of my late notes. I plan on getting more aggressive with Lending Club though as I like everything I’ve seen there so far. I have far more confidence with Lending Club. I’d love to hear comments from anyone else who has experience at Prosper with bad notes.

I have asked the management at Prosper several times about their collection practices, I really want to do a post on this one day, but haven’t had much luck getting any details. I can tell you this. I have seen some of my notes come back to current after being in collections but they seem to have a worse record than Lending Club in this regard. This is based on just anecdotal evidence, I have no formal data to back this up. Having said that, Prosper deals with a higher risk borrower, on average, than Lending Club so it would make sense that their collections were not as successful.

Congrats Tim. I don’t want to disappoint you but anyone can get an initial NAR of 22% or more by just investing in every G-rated loan. The challenge will be keeping this NAR high. You have chosen a high risk portfolio with the likelihood of a higher percentage of defaults. How much these defaults will impact you overall returns will depend on how well you have chosen your loans. I wish you the best of luck.

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